Commentary by David F. Larcker, James Irvin Miller Professor of Accounting & Director, Stanford GSB Corporate Governance Research Program; and Brian Tayan, Stanford GSB Case Writer, MBA ’03.
Last week, Ari Balogh, chief technology officer of Yahoo!, announced suddenly that he was stepping down from his position. He had been in the role for less than a year.
Turnover among the executive suite should come as no surprise. Executives retire, resign, are fired, are recruited away, and even (unfortunately) die on the job. What is surprising, however, is how many companies are woefully unprepared to act on this eventuality.
Following Balogh’s resignation, a company spokesman said that it would take a few weeks to name a successor. When former Bank of America CEO Ken Lewis announced his resignation last year, the company engaged in a prolonged, public, and embarrassing search for a successor. After being visibly refused by Bank of New York CEO Brian Kelly, the company finally settled on insider Brian Moynihan. General Motors, too, had vacancies in both the CEO and CFO positions for extended periods of time, with Chairman Ed Whitacre assuming the title of “interim CEO” until finally deciding the take the job permanently himself.
While it is easy to explain away each of these as exceptions, survey data indicates that instead they are the rule. According to the National Association of Corporate Directors (NACD), 44 percent of companies do not have a formal CEO succession plan in place. While the majority have a process to replace the CEO in an emergency, many have not planned for succession over a three-to-five year period. Pending SEC regulations would require companies to increase disclosure about their CEO succession plans.
Based on our research, there are five models of succession planning: 1) hire a search firm to recruit an external candidate,
2) hire a COO who serves as an apprentice of sorts before being promoted to the CEO position,
3) initiate an internal horse race in which multiple candidates compete for the job,
4) structure an inside-outside search in which internal candidates are developed and then benchmarked against the external talent pool before a successor is chosen, and
5) be caught off guard and then scramble to do something.
From our standpoint, it doesn’t really matter which model a company follows… so long as it’s not the last one.